Mike,Have a read of this from Zero Hedge...

Mike,

Have a read of this from Zero Hedge today:

http://www.zerohedge.com/article/quantitative-easing-has-been-monetary-failure-persistent-deflation-means-more-fed-interventi

The gist being that deflation is still the game and that more QE is on the way from the Fed. Good ol Tyler Durden concludes:

"The end result of all these actions, of course, is that the value of the dollar is about to plummet: when Bernanke announces that not only will he not end QE but that he will launch another version of the program, expect the dollar to take off on its one way path to $2 = €1. And when that happens, look for global trade to cease completely. In its quest to continue bailing out the banking system and rolling the trillions of toxic loans it refuses to accept are worthless (for if it did, equity values in the banking system would go, to zero immediately), the Fed will promptly resume destroying not only the US middle class, but the entire system of global trade built through many years of globalization. Look for America to end up in an insulated liquidity bubble in a few short years, trading exclusively with its vassal master: the People's Republic of China."


Just thought it would be something you're interested in since it supports your deflationary view.

My counterargument is the following:

1) Central banks around the world will always step in and buy the dollar when it starts to fall too fast. Why wouldn't they? As Tyler points out, world trade WOULD collapse.

To look at it another way - investors, and world banks could afford to lose confidence in Argentinian debt. Yes, they took a hit on the default, but it's not like world trade would come to and end. So they stopped loaning them money. Why didn't they just do what they do with the US and just ponzi up their debt and keep adding more in? Was it trade related? After all, all the money that was lent to the country flowed straight out again in the form of imports. That's just how it goes for the US today. So by that (false) logic the ponzi scheme of just piling more debt on debt as China does the USA should have just been able to keep going. It didn't. Why not?

2 reasons. First of all - Argentina had a currency peg which kept imports cheap. Unbelievably stupid - but the government couldn't face the prospect of impoverishing their middle class. The currency peg meant that their own manufacturing base went to pot (so they were getting poorer in real terms all the time - irrespective of the perception). So investors realised that because of this that at some point Argentina wouldn't be able to make the interest payments on their debt.

Secondly - nothing about the geo-political reality forced them to keep purchasing the debt. Argentina was not the engine of world growth. A few hits were taken - but nothing systemically bad.

Neither of these two conditions hold for America.

Their currency is not on a peg. So there is no prospect of a currency collapse as a result of an artificial peg being removed. So the currency is can devalue so as to prevent a balance of payments crisis. After all this is 90 percent of the reason why we have fiat currencies. GOld standards led to such crisis every other day. Zero Hedge can claim the dollar devaluation to be an artificial result of QE - and to some extent it is. But also the story is that America has a massive trade deficit. So its currency must devalue to a point where it can only afford to import as much as it can export in real terms.

Secondly - it's all big whoops for everyone if the collapse is sudden as it was in Argentina. Industry in the US needs time to shift from producing giant gas guzzling cars that American consumers can't afford - to producing small and efficient cars that chinese folk might wanna buy. Chinese industry needs to shift from building crap t-shirts that american fatties will wanna wear. America is going on a diet after all. (just you watch the obesity rates plummet in the US over the next decade). They need time to re-tool their economy to service local markets.

And finally - as I ranted about before - American military polices the world. If the dollar collapses then a GI serving in Iraq can't buy himself so much as a coffee. He walks.

So they won't turn off the debt tap - even IF the numbers are such that America can't possibly pay back the debt.

But what about ol' Mish, Ctindale (has he got me on ignore? - he never responds to my posts) and the deflationary argument.

The core of the argument is that money supply should be defined in terms of credit. This is an argument in itself - but I'll wear it to start with. The second premise is that the distribution channel for this credit is maxed out - the american consumer. So the claim is that even if the world wants to keep piling money into America for geo-political reasons - they can't because there is no distribution mechanism. This is where the math comes in. For them it's so simple that even a child could work it out:

http://www.321gold.com/editorials/denninger/denninger091709.html

So says the great denninger!

Of course - does he make any mention at all of the effects of a depreciating dollar on interest payments? No. The next video is of a guy who was sensible enough to add this factor into his calculations

http://www.youtube.com/watch?v=0-ZZFmKFk1s&feature=channel_page

50 percent depreciation over 14 years will see them through. But what this guy MISSES. So this guy is one step ahead of denninger and most other deflationists at least. But he still misses one vital point. The difficulty as he sees it is that the market will try to pre-empt the dollar devaluation - and short it into a collapse. This reasoning is sound - if you know the fed is going to push it lower, you're going to want to load up on shorts.

However, the mistake he makes is in assuming that this will force the fed to raise rates to defend the dollar against the collapse. (because they won't accept SDRs as a replacement reserve currency because then they can't print to fund wars etc). And because this is politically not feasible, everyone assumes the fed will have no choice but to watch the dollar tank. It's the rock and a hard place argument.

As I've been arguing this is a mistake because they aren't factoring in the geo political issues. No one wants America to suddenly devalue. They want to protect their existing reserves, and many want America to protect western political values, and they want to give their export industries time to adapt. So if the market tries to tank the dollar - all the other central banks will step in and support it. The US Fed won't have to raise rates at all. The rest of the world will defend the dollar for them. US policy makers know it. The rest of the world's policy makers know it.

I know it. But for some reason the internet hasn't caught on.

The only way the collapse will happen is if some nut makes a play against american hegemony. The math is secondary.